SEC passes tighter rules for prime money funds

Remember 2008? Barack Obama was elected to his first term, the New York Giants defeated the New England Patriots in the Super Bowl... oh yeah, and investors fled screaming from money-market mutual funds during the financial crisis.

Not eager to see a repeat, the Securities and Exchange Commission (SEC) sprung into action, and on July 23, the Commission passed new rules intended to prevent an exodus of investors in the case of potential economic hardship.

The rules require prime money funds that cater to large, institutional investors to float in value like other mutual funds, moving away from their previous fixed $1 share price. Prime funds sold to individual investors, however, are allowed to keep the $1 share price. In addition, during times of stress, the new rules allow money funds to block investors from withdrawing cash or impose fees on those investors for them to redeem shares.

The SEC passed the new regulations in a 3-2 vote. Companies will now have two years to comply with the new rules.

“Today’s reforms fundamentally change the way that money market funds operate. They will reduce the risk of runs in money market funds and provide important new tools that will help further protect investors and the financial system,” said SEC Chair Mary Jo White in a statement on the new rules. “Together, this strong reform package will make our markets more resilient and enhance transparency and fairness of these products for America’s investors.”

Although the asset-management industry typically rejects these types of increased rules, those who spoke with the Wall Street Journalindicate that they believe the SEC’s rules are fair. Paul Schott Stevens, president and chief executive of the Investment Company Institute, said his group “may question some aspects” of the new regulations, but he also believed the SEC “proceeded thoughtfully to craft a robust and meaningful” set of rules. Nancy Prior, president of fixed income for Fidelity Investments, agreed with Stevens, saying, “Our initial reaction is that the SEC has struck a reasonable balance.”

Assistant Editor

Zach Warren

Zach Warren is Assistant Editor of InsideCounsel magazine, where he oversees online content submissions and administers InsideCounsel's enewsletters. Zach specializes in new media and multimedia...